DEFENSE BUSINESS BOARD Report to the Secretary of Defense Taking Advantage of Opportunities for Commercial Satellite Communications Services Report FY13-02 Recommendations to help DoD better leverage opportunities from commercial satellite providers Preface This report is a product of the Defense Business Board (DBB). Recommendations by the DBB are offered as advice and do not represent DoD policy. The DBB was established by the Secretary of Defense in 2002 to provide the Secretary and the Deputy Secretary of Defense with independent advice and recommendations on how “best business practices” from the private sector’s corporate management perspective might be applied to the overall management of the Department of Defense (DoD). The Board’s members, appointed by the Secretary of Defense, are corporate leaders and managers with demonstrated executive-level management and governance expertise. They possess a proven record of sound judgment in leading or governing large, complex corporations and are experienced in creating reliable solutions to complex management issues guided by best business practices. Authorized by the Federal Advisory Committee Act of 1972, the Government in Sunshine Act of 1976, and other appropriate federal regulations, the Board members are a federal advisory committee and volunteer their time to work in small groups (subcommittees) to develop recommendations and effective solutions aimed at improving DoD. THIS PAGE LEFT INTENTIONALLY BLANK Defense Business Board Taking Advantage of Opportunities for Commercial Satellite Communications Services TASK The Department of Defense (DoD) relies upon the United States commercial satellite private sector to provide about 40% of its satellite communication services at a cost of roughly $640 million per year. These commercial satellite service providers often approach DoD with business propositions that include opportunities for attractive deals in terms of time, money, and capability. Some of these propositions would require DoD to contractually commit to satellite services when available, sometimes on an annual basis, or other times over a multi-year period that would require up front dollars for the purchase agreement. On many occasions, DoD is unable to take advantage of these offers due to either existing processes (i.e. the Federal Acquisition Regulations, Joint Capabilities Integration Development System, and Planning, Programming, Budgeting and Execution) or statutory restrictions, many of which are beyond DoD’s control. DoD’s need for satellite communication services is expected to escalate dramatically in the near future. Additionally, in a time when DoD is under severe budget constraints, every effort should be made to take advantage of opportunities to reduce overall costs. Because of these two dynamics, DoD should position itself now to more cost-effectively manage this known and growing requirement. To help address this issue, the Deputy Secretary of Defense tasked the Defense Business Board (hereinafter referred to as “the Board”) to form a Task Group to identify impediments to DoD’s ability to better utilize the commercial satellite sector and recommend ways forward that allow DoD to better leverage opportunities from commercial satellite communications service providers. A copy of the Terms of Reference (TOR) outlining the scope and deliverables for the Task Group can be found at Tab A. Mr. Neil Albert served as the Task Group Chair. The other Task Group members were Mr. Joseph Wright, Mr. David Langstaff, and Ms. Leigh Warner. Colonel Larry Kominiak, USA, and Colonel Christopher Taking Advantage of Opportunities for Commercial REPORT FY13-02 Satellite Communications Services Task Group 1 Defense Business Board McPhillips, USMC, served as the Board Military Assistants. Kelsey Keating served as the Board Staff Analyst. PROCESS The Task Group’s draft findings and recommendations were presented to the Board for deliberation at the January 24, 2013 quarterly meeting where the Board voted to approve the recommendations. See Tab B for a copy of the brief approved by the Board. As part of the tasking by the Deputy Secretary of Defense, the Task Group was directed to: Identify impediments to DoD’s ability to better utilize the commercial satellite sector Recommend ways forward that allow DoD to better leverage opportunities from the commercial satellite service providers Review the opportunities, internal obstacles to implementation, and any corrective actions required to enable DoD to rapidly evaluate and take advantage of potential commercial satellite communications services The Task Group conducted more than 20 interviews with prominent and experienced DoD and commercial satellite industry leaders. Tab C contains a list of the individuals interviewed. The Task Group also reviewed data from relevant US, DoD, and Government Accountability Office studies, reports, and strategies. BACKGROUND Based on interviews and reviews of numerous government and industry reports, the Task Group established the following common terminology to define specific segments of the global satellite market: SATCOM: all satellite communications (~58% of the global satellite market). SATCOM is further sub-divided into: o MILSAT: Military Satellite Communications o GOVSAT: Civilian Government Satellite Communications o COMSAT: Commercial Satellite Communications Taking Advantage of Opportunities for Commercial REPORT FY13-02 Satellite Communications Services Task Group 2 Defense Business Board Specialized satellites (~42% of the global satellite market): meteorology, navigation, remote sensing The predominant MILSAT systems include the Advanced Extremely High Frequency Satellite (AEHF), Enhanced Polar System Satellite (EPS), Mobile User Objective System Satellite (MUOS), and the Wideband Global SATCOM System (WGS). Within the SATCOM market, the Task Group examined the basic workings of the MILSAT and COMSAT segments. Specifically, the Task Group identified that DoD exclusively controls MILSAT procurement, including electromagnetic spectrum frequencies, through the United States Air Force Space and Missile Command (SMC). COMSAT is controlled by the private sector and driven by investors who seek to maximize profits based on supply and demand. When COMSAT services are required by DoD, the Defense Information Systems Agency (DISA) uses General Services Administration (GSA) contracts to procure the needed services from the commercial market place. Of note, MILSAT and COMSAT services are not always interchangeable due to unique DoD needs and multiple operating frequencies. The DoD Market In Fiscal Year 2010, DoD spent $1.6B on SATCOM services, of which 60% was spent on MILSAT and 40% on COMSAT. Taking Advantage of Opportunities for Commercial REPORT FY13-02 Satellite Communications Services Task Group 3 Defense Business Board The DoD Market FY10 DoD SATCOM Costs (excluding GOVSAT): $1.6B MILSAT 60% $960M COMSAT 40% $640M Source: DISA Examining COMSAT expenditures, DISA currently meets COMSAT requirements through a mix of one-year leases (75%) and “spot market” purchases at premium rates (25%). As the demand for service increases in the future, the cost of COMSAT services purchased by DISA is projected to grow to $3B-$5B over the next 15 years. This growth will cost DoD precious dollars during a period of tightening budgets if DoD does not change its current approach to procuring COMSAT services. The Commercial Satellite Market Until recently, MILSAT capabilities outpaced COMSAT, however, in today’s competitive and global marketplace, the COMSAT market is well established and fully capable of meeting much of DoD’s satellite service needs. The COMSAT market is rapidly expanding to meet increased global demands for services such as satellite television and high definition video broadcasting. As a result of the high demand for these types of services and a healthy return on investment, the COMSAT “fill rates” in many geographical areas are currently at 80% without any DoD participation. While COMSAT capabilities and frequency requirements are similar to MILSAT, DoD is clearly not the driver for the commercial sector’s market growth. With COMSAT assets being rapidly committed to commercial activities, DoD will likely experience future increased competition and hence, increased cost, for commercial satellite contracts. Additionally, since the COMSAT industry is multinational in nature, some commercial firms with foreign equity interests may not be viewed as “friendly” to DoD’s contracting requirements further limiting the available commercial providers and likely having an added impact on the cost for satellite services. Taking Advantage of Opportunities for Commercial REPORT FY13-02 Satellite Communications Services Task Group 4 Defense Business Board FINDINGS Based upon interviews with DoD officials and commercial satellite industry leaders, as well as reviews of past satellite studies, reports, and strategies, the Task Group identified four major findings. The findings are described below. 1. COMSAT is needed to satisfy future DoD requirements but impediments exist COMSAT currently supports 40% of DoD’s SATCOM needs. According to Northern Sky Research (NSR), a telecom industry research firm, DoD’s requirements will grow by 68% over the next decade. This requirements increase is due to the rebalancing of US forces towards the Asia-Pacific region, greater Navy activity patrolling the sea lanes, increased monitoring of world events, and increased activity in the war on drugs. Implementation